SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter ended: September 30, 1998 Commission File Number: 0-19589
----------------- -------
ARGUSS HOLDINGS, INC.
--------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 02-0413153
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or
organization)
One Church Street, Suite 302, Rockville, Maryland 20850
- ----------------------------------------------------- -----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 301-315-0027
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:
----- -----
As of October 30,1998, there were 10,539,809 shares of Common Stock, $.01 par
value per share, outstanding.
<PAGE>
ARGUSS HOLDINGS, INC.
INDEX
Part I - Financial Statements:
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited)
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations (Unaudited)
Three months and Nine Months Ended September 30, 1998
and September 30, 1997 4
Consolidated Statements of Cash Flows (Unaudited)
Nine months Ended September 30, 1998
and September 30, 1997 5
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II - Other Information
Items 1 through 6 16
Signatures 17
2
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Sept. 30, 1998 Dec. 31,1997
-------------- ------------
Assets
Current assets:
Cash $ 1,593,000 $ 1,215,000
Restricted cash from customer advances 3,189,000 --
Accounts receivable trade, including
retainage of $4,291,000 and $1,884,000,
respectively 41,559,000 13,656,000
Unbilled receivables for materials 8,208,000 274,000
Inventories 4,466,000 4,344,000
Other assets, current 1,393,000 1,898,000
------------ ------------
Total current assets 60,408,000 21,387,000
Property, plant and equipment, net 27,234,000 13,274,000
Goodwill, net 53,715,000 24,374,000
------------ ------------
$141,357,000 $ 59,035,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion long-term debt $ 10,751,000 $ 1,632,000
Short-term borrowings 9,470,000 4,294,000
Accounts payable 16,907,000 4,141,000
Customer advances 7,000,000 --
Accrued expenses and other liabilities 10,092,000 4,212,000
------------ ------------
Total current liabilities 54,220,000 14,279,000
------------ ------------
Long-term debt, excluding current portion 21,715,000 6,995,000
Deferred income taxes 2,225,000 791,000
------------ ------------
Total liabilities 78,160,000 22,065,000
------------ ------------
Stockholders' equity:
Common stock $.01 par value 108,000 85,000
Additional paid-in capital 60,088,000 36,443,000
Retained earnings 3,001,000 442,000
------------ ------------
Total stockholders' equity 63,197,000 36,970,000
------------ ------------
$141,357,000 $ 59,035,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 45,908,000 $ 14,168,000 $104,741,000 $ 35,826,000
Cost of sales, excluding depreciation 34,543,000 9,610,000 78,578,000 24,375,000
------------ ------------ ------------ ------------
Gross profit, excluding depreciation 11,365,000 4,558,000 26,163,000 11,451,000
Expenses:
Selling, general and administrative 3,889,000 2,374,000 11,247,000 5,943,000
Depreciation 1,668,000 376,000 4,463,000 824,000
Goodwill amortization 687,000 225,000 1,992,000 618,000
Engineering and development 362,000 238,000 905,000 811,000
------------ ------------ ------------ ------------
Income from operations 4,759,000 1,345,000 7,556,000 3,255,000
Interest expense, net 691,000 104,000 1,963,000 250,000
------------ ------------ ------------ ------------
Income before income taxes 4,068,000 1,241,000 5,593,000 3,005,000
Income tax expense 1,902,000 631,000 3,034,000 1,003,000
------------ ------------ ------------ ------------
Net income $ 2,166,000 $ 610,000 $ 2,559,000 $ 2,002,000
============ ============ ============ ============
Income per share - basic $ .20 $ .08 $ .24 $ .27
============ ============ ============ ============
Weighted average number
of shares - basic 10,697,000 7,643,000 10,493,000 7,395,000
============ ============ ============ ============
Income per share - diluted $ .18 $ .08 $ .23 $ .26
============ ============ ============ ============
Weighted average number of shares
- diluted 12,068,000 8,017,000 11,359,000 7,671,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,559,000 $ 2,002,000
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation 4,470,000 824,000
Goodwill amortization 1,992,000 618,000
Non cash stock compensation 1,847,000 128,000
Deferred income taxes -- 187,000
Changes in assets and liabilities:
Accounts receivable (18,387,000) (2,941,000)
Unbilled receivables for materials (7,934,000) --
Inventories (122,000) (80,000)
Other current assets 996,000 (624,000)
Accounts payable 7,763,000 (1,595,000)
Accrued expenses and other liabilities 5,318,000 2,228,000
------------ ------------
Net cash (used in) provided by operating
activities (1,498,000) 747,000
------------ ------------
Cash flows from investing activities:
Net additions to property, plant and equipment (10,619,000) (3,898,000)
Purchase of cable construction companies (17,441,000) (8,936,000)
------------ ------------
Net cash used for investing activities (28,060,000) (12,834,000)
Cash flows from financing activities:
Proceeds from lines of credit 33,015,000 4,930,000
Repayments of financing debt (4,000,000) --
Issuance of common stock 921,000 --
------------ ------------
Net cash provided by financing activities 29,936,000 4,930,000
------------ ------------
Net increase (decrease) in cash and
restricted cash 378,000 (7,157,000)
------------ ------------
Cash at beginning of period 1,215,000 10,318,000
------------ ------------
Cash at end of period $ 1,593,000 $ 3,161,000
============ ============
</TABLE>
5
<PAGE>
ARGUSS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOW (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Supplemental disclosures of cash paid for:
Interest $ 2,275,000 $ 121,000
Corporate income taxes 923,000 190,000
Supplemental disclosure of
investing and financing activities:
Fair value of assets acquired:
Accounts receivable $ 9,513,000 $ 6,766,000
Inventory -- --
Other current assets 491,000 748,000
Property and equipment 7,546,000 5,512,000
------------ ------------
Total non cash assets 17,550,000 13,026,000
------------ ------------
Liabilities (6,437,000) (5,620,000)
Long-term debt (2,455,000) (2,782,000)
------------ ------------
Net non cash assets acquired 8,658,000 4,624,000
Cash acquired 1,725,000 278,000
------------ ------------
Fair value of net assets acquired 10,383,000 4,902,000
Excess of costs over fair value
of net assets acquired 31,332,000 22,703,000
------------ ------------
Purchase price $ 41,715,000 $ 27,605,000
============ ============
Common stock issued $ 24,274,000 $ 18,669,000
Cash paid 19,166,000 9,214,000
Cash acquired (1,725,000) (278,000)
------------ ------------
Purchase price $ 41,715,000 $ 27,605,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ARGUSS HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
A) ORGANIZATION
The Company conducts its operations through its wholly owned subsidiaries,
Arguss Communications Group, Inc. ("ACG") (formerly White Mountain Cable
Construction Corp.) and Conceptronic, Inc. ("Conceptronic"). ACG is engaged in
the construction, reconstruction, maintenance, repair and expansion of
communications systems, cable television and data systems, including providing
aerial and underground construction and splicing of both fiber optic and coaxial
cable to major telecommunications customers. ACG operates through its divisions
- - White Mountain, Can-Am, TCS, Rite, Schenck and Underground Specialties.
Conceptronic manufactures and sells highly advanced, computer-controlled
equipment used in the SMT circuit assembly industry.
B) BASIS FOR PRESENTATION
As permitted by the rules of the Securities and Exchange Commission (the
"Commission") applicable to quarterly reports on Form 10-QSB, these notes are
condensed and do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the financial statements and
related notes included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997, filed with the Commission on March 24, 1998.
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments considered necessary to present fairly the financial
position of the Company as of September 30, 1998 and the results of operations
and cash flows for the periods presented. The Company prepares its interim
financial information using the same accounting principles as it does for its
annual financial statements.
The Company's cable construction operations are expected to have seasonally
weaker results in the first and fourth quarters of the year, and may produce
stronger results in the second and third quarters. This seasonality is primarily
due to the effect of winter weather on outside plant activities in the northern
areas served by ACG, as well as reduced daylight hours and customer budgetary
constraints. Certain customers tend to complete budgeted capital expenditures
before the end of the year, and postpone additional expenditures until the
subsequent fiscal period.
Research and development expenses, a component of engineering and development
expenses, incurred and expensed were $308,000 and $295,000, respectively, for
the three months ended September 30, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, "Reporting Comprehensive Income". This Statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid in capital in the equity section of a
statement of financial position. The impact of this statement on the Company's
financial statements is not significant because the Company has no elements of
comprehensive income at this time.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments and
Related Information". This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures. The
adoption of this statement has no impact on the consolidated financial
statements.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosure about Pensions and Other Post-retirement Benefits," which
revises employers' disclosures about pension and other post-retirement benefit
plans. It does not change the measurement or recognition of those plans. The
statement is effective for fiscal years beginning after December 15, 1997. The
adoption of this statement has no impact on the consolidated financial
statements.
7
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company will adopt SFAS No. 133
by January 1, 2000. Adoption of SFAS No. 133 is not expected to have a material
impact on the consolidated financial statements.
Certain amounts in the 1997 financial statements have been reclassified for
comparability with the 1998 presentation.
C) EARNINGS PER SHARE
Basic income per common share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted income per common share reflects the maximum dilution that would
have resulted from the exercise of stock options and warrants. Diluted income
per common share is computed by dividing net income by the weighted average
number of common shares and all dilutive securities.
<TABLE>
<CAPTION>
For the Three Months Ended
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
Income Net Income Net
per Share Shares Income per Share Shares Income
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $ .20 10,697,000 $2,166,000 $ .08 7,643,000 $610,000
Effect of stock options
and warrants (.01) 625,000 -- -- 374,000 --
Effect of estimated
additional shares to be
issued for Schenck
purchase (.01) 746,000 -- -- -- --
-------- ---------- ---------- ------- --------- --------
Diluted $ .18 12,068,000 $2,166,000 $ .08 8,017,000 $610,000
======== ========== ========== ======= ========= ========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
Income Net Net Income Net
per Share Shares Income per Share Shares Income
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $ .24 10,493,000 $2,559,000 $ .27 7,395,000 $2,002,000
Effect of stock options
and warrants (.01) 620,000 -- (.01) 276,000 --
Effect of estimated
additional shares to be
issued for Schenck
purchase -- 246,000 -- -- -- --
-------- ---------- ---------- ------- --------- ----------
Diluted $ .23 11,359,000 $2,559,000 $ .26 7,671,000 $2,002,000
======== ========== ========== ======= ========= ==========
</TABLE>
D) ACCOUNTS RECEIVABLE
The retainage included in accounts receivable, which represents amounts withheld
by contract with respect to ACG accounts receivable, was $4,291,000 at September
30, 1998. The Company expects to collect substantially all such retainage within
one year. Further, costs incurred in excess of billings included in accounts
receivable is expected to be billed and collected currently.
8
<PAGE>
E) ACQUISITIONS
In the first quarter of 1998, the Company acquired Can-Am Construction, Inc.
("Can-Am") and Schenck Communications, Inc. ("Schenck"), which provide aerial
and underground construction and splicing services for both fiber optic and
coaxial cable to major telecommunications customers.
The purchase price was approximately $35 million and consisted of 1,809,000
shares of common stock of the Company and approximately $15 million in cash. The
Company has classified as goodwill approximately $27.4 million, which represents
the cost in excess of the fair value of the net assets acquired. Goodwill is
being amortized using the straight-line method over 20 years. The Schenck
purchase agreement contains provision for additional payments by the Company to
Schenck shareholders to be satisfied by the issuance of the Company's common
stock and cash, if certain adjusted EBITDA thresholds are met for the year
ending December 31, 1998. There is no cap for such provisional payments.
One-half of the additional payment to Schenck shareholders will be satisfied by
the issuance of shares of common stock valued at $9.75 per share. The second
half of the payment will be in cash. Any additional payments earned under the
terms of the agreement will be recorded as an increase in goodwill. The Company
has included 746,000 shares and 246,000 shares as common stock equivalents in
its calculation of diluted earnings per share for the three and nine months
ended September 30, 1998, respectively, as an estimate of the average shares
outstanding for additional shares projected to be issued with respect to the
Schenck purchase agreement.
In the third quarter of 1998, the Company acquired Underground Specialties, Inc.
("USI") which provides underground building services for fiber optic cable
construction projects to major telecommunications customers.
The purchase price was approximately $7.3 million and consisted of 242,000
shares of common stock of the Company and approximately $3.6 million in cash.
The Company has classified as goodwill approximately $4.0 million, which
represents the cost in excess of the fair value of the net assets acquired.
Goodwill is being amortized using the straight-line method over 20 years. The
USI purchase agreement contains provision for additional payments by the Company
to USI shareholders to be satisfied by the issuance of the Company's common
stock and cash, if certain adjusted EBITDA thresholds are met for the year
ending July 31, 1999. There is no cap for such provisional payments. One-half of
the additional payment to USI shareholders will be satisfied by the issuance of
shares for common stock valued at the lesser of $15.50 per share or the market
value with a minimum price of $13.625. The second half of the payment will be in
cash. Any additional payments earned under the terms of the agreement will be
recorded as an increase in goodwill.
The following unaudited pro forma results of operations give effect to the 1998
purchase of USI as if it occurred as of January 1, 1998. Such pro forma
information reflects certain adjustments, including amortization of goodwill,
accrual of income taxes, interest expense, additional shares issued and salary
expense consistent with Arguss' compensation program:
Pro Forma (unaudited)
---------------------
Sales $122,378,000
============
Net Income $ 4,965,000
============
Income per share - basic $ .46
============
Weighted average number of shares - basic 10,735,000
============
Income per share - diluted $ .43
============
Weighted average number of shares - diluted 11,601,000
============
9
<PAGE>
F) ENTERPRISE SEGMENT INFORMATION
The Company's operations have been classified into two business segments for the
three months and nine months ended September 30, 1998, Communications and
Manufacturing, respectively. Summary financial information for the two segments
is as follows:
<TABLE>
<CAPTION>
Sept. 30, 1998
--------------
Three Months Ended Nine Months Ended
------------------ -----------------
Manufacturing Communications Manufacturing Communications
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 3,456,000 $ 42,452,000 $ 13,233,000 $ 91,508,000
Cost of sales,
excluding depreciation 2,324,000 32,219,000 8,841,000 69,737,000
------------ ------------ ------------ ------------
Gross profit,
excluding depreciation 1,132,000 10,233,000 4,392,000 21,771,000
------------ ------------ ------------ ------------
Operating expenses,
excluding depreciation 1,417,000 2,090,000 4,447,000 5,858,000
Goodwill amortization -- 687,000 -- 1,992,000
Non cash stock compensation -- 742,000 -- 1,806,000
Depreciation expense 55,000 1,613,000 164,000 4,299,000
Net interest and other income 46,000 658,000 138,000 1,855,000
------------ ------------ ------------ ------------
Pretax income (loss) ($ 386,000) $ 4,443,000 ($ 357,000) $ 5,961,000
============ ============ ============ ============
Capital expenditures $ 64,000 $ 3,523,000 $ 106,000 $ 10,943,000
============ ============ ============ ============
Property, plant and
equipment, net $ 1,318,000 $ 25,885,000 $ 1,318,000 $ 25,885,000
============ ============ ============ ============
Total assets $ 9,155,000 $131,360,000 $ 9,155,000 $131,360,000
============ ============ ============ ============
Total liabilities $ 4,149,000 $ 70,072,000 $ 4,149,000 $ 70,072,000
============ ============ ============ ============
</TABLE>
(1) Segment information does not reconcile to consolidated net income before
tax due to net unallocated corporate expense of $11,000 which is the net of
$29,000 in interest income and $40,000 in stock option expense for the nine
months ended September 30, 1998. For the three months ended September 30,
1998, the net corporate difference was income of $11,000, which is a net of
$14,000 in interest income and $3,000 in stock option expense.
(2) Excludes inter-company payables of $1,222,000 for manufacturing and
$1,780,000 for communications segments, respectively at September 30, 1998.
G) LONG-TERM DEBT
On January 2, 1998, the Company expanded its credit facilities with NationsBank,
NA. In connection with its acquisition of Can-Am and Schenck, the Company
entered into an aggregate of $15,016,000 in new acquisition financing
facilities. The facilities have a five-year amortization rate for repayment of
the principal and include a balloon payment of approximately $4 million due on
March 31, 1999. The acquisition financing bears an interest rate of LIBOR plus
275 basis points which is subject to a reduction in rate to LIBOR, plus 175
basis points if certain cash flow objectives are achieved.
In October 1998, the Company expanded its credit facilities with NationsBank,
NA. In connection with its acquisition of USI, the Company entered into an
aggregate of $3.5 million in a new acquisition financing facility. The financing
has a five-year amortization rate for repayment of principal and bears an
interest rate of LIBOR plus 175 basis points.
During the nine months ended September 30, 1998, the Company expanded both its
ACG revolving credit facility from $4 million to $15 million, and equipment
financing facility from $3.5 million to $13 million, generally under the same
interest rates and covenants as the original lines of credit.
10
<PAGE>
Further, on January 2, 1998, the Company consummated a term loan to refinance
existing equipment financing facilities at Can-Am and Schenck. The proceeds of
this line were $2,400,000, are payable over 48 months, and bear an interest rate
at LIBOR, plus 165 basis points.
To hedge the variable term loan interest rate risk for $10 million in notional
amount of the acquisitions financing facilities, $3,700,000 in notional amount
of equipment financing and $2,400,000 in notional amount of the refinancing term
loan, during the nine months ended September 30, 1998, the Company entered into
various interest rate swaps pursuant to which it pays fixed interest rates and
receives variable interest rates on the same notional amount. During the nine
months ended September 30, 1998, the Company payment under the three new
interest rate swaps aggregated $34,000. The Company had no receipts pursuant to
the new interest rate swaps.
H) LITIGATION
On December 13, 1991, the Company was served with a complaint from Vitronics
Corporation ("Vitronics"), one of the Company's competitors, alleging patent
infringement involving its reflow soldering ovens. Vitronics sought an
injunction, together with unspecified damages and costs. The claim was filed in
the United States Federal District Court, District of New Hampshire.
In August 1995, the U.S. District Court issued a directed verdict of
non-infringement in the Company's favor regarding method patent #4,654,502.
Additionally, a decision was reached on the apparatus patent #4,833,301 by a
jury which found non-infringement on all past and current Conceptronic ovens.
Vitronics appealed the directed verdict on patent #4,654,502 and the United
States Court of Appeals for the First Circuit ("Court of Appeals") subsequently
reversed and remanded the case for further proceeding. In October 1997, the
Court of Appeals administratively dismissed the case.
In related actions, in April 1997, the United States Patent Office ("PTO")
rejected certain claims of Vitronics' patent #4,654,502 as being unpatentable.
This decision by the PTO, if upheld on appeal, should terminate the pending
lawsuit. In December 1996, the Company named Vitronics and its Chairman and CEO,
James Manfield in a lawsuit, filed in Superior Court of the State of New
Hampshire, citing malicious prosecution and abuse of process. The suit claims
that Vitronics, when it initiated the 1991 patent infringement case against
Conceptronic, knew or should have known that the suit was without merit and that
claim 1 of U.S. Patent #4,883,301 was invalid, unenforceable and, as a
consequence, the patent was not infringed. In November 1997, Dover Industries
purchased Vitronics and succeeded in their interest.
In the opinion of counsel, the ultimate outcome of this litigation cannot
presently be determined. Management of the Company believes that Vitronics'
claim is without merit and that the Company will ultimately prevail.
Accordingly, no provision has been made in the accompanying financial statements
for any potential liability that might result.
11
<PAGE>
ARGUSS HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company conducts its operations through its wholly owned subsidiaries,
Arguss Communications Group, Inc. ("ACG") (formerly White Mountain Cable
Construction Corp.) and Conceptronic, Inc. ("Conceptronic"). ACG is engaged in
the construction, reconstruction, maintenance, repair and expansion of
communications systems, cable television and data systems, including providing
aerial and underground construction and splicing of both fiber optic and coaxial
cable to major telecommunications customers. ACG operates through its divisions
- - White Mountain, Can-Am, TCS, Rite, Schenck and Underground Specialties.
Conceptronic manufactures and sells highly advanced, computer-controlled
equipment used in the Surface Mount Technology ("SMT") circuit assembly
industry.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
The Company had net income of approximately $2,166,000 for the three months
ended September 30, 1998, compared to net income of $610,000 for the three
months ended September 30, 1997. During the three months ended September 30,
1998 improvement in earnings was due primarily to the profitable results of ACG
whose pretax income was $4,443,000, compared to $1,269,000 in the comparable
period in 1997. The increase in pretax income is due primarily to the strong
quarterly performance of the TCS, Schenck and Underground Specialties divisions,
which had strong performances in their respective construction projects in
Denver and the Pacific Northwest. Schenck and Underground Specialties with
$3,161,000 in pretax income are included in results only in 1998.
Net sales for the three months ended September 30, 1998 increased $31,740,000 or
more than three-fold to approximately $45,908,000 from approximately $14,168,000
for the three months ended September 30, 1997 due primarily to the acquisition
of Schenck, Can-Am, USI and Rite (collectively "Acquisitions") which had
combined sales of $18,973,000 and also due to strong sales increase of
$14,228,000 at White Mountain and TCS divisions. Conceptronic's sales were
$1,461,000 below the levels achieved for the three months ended September 30,
1997 due primarily to the industry-wide softening of activity in the SMT circuit
assembly equipment industry. The Company expects a continued softening in
activity in the SMT circuit assembly equipment industry during the fourth
quarter, which may have a negative impact on Conceptronic's operating results.
Consolidated gross profit margin, excluding depreciation, was 25% of sales for
the three months ended September 30, 1998 compared to 32% for the comparable
period in 1997. ACG's gross profit margin was 24% for the three months ended
September 30, 1998, compared to 30% for the three months ended September 30,
1997. The decline in margins is due to the White Mountain division's transition
costs incurred in commencing a project in Charlotte, North Carolina, which
should generate improved margins beginning in the fourth quarter. White Mountain
division has reduced its involvement with its Dallas, Texas project and does not
expect significant contribution to gross profit from this project in the fourth
quarter. Further, the underground construction mix of business has historical
profit margins typically less than the gross profit margin levels of the aerial
construction's mix of business. Conceptronic's gross profit margin was 33% for
the three months ended September 30, 1998 which, although below the 36% gross
profit margin achieved for the comparable period in 1997, is consistent with
historical operating levels.
Selling, general and administrative expenses for the three months ended
September 30, 1998 were $3,889,000 compared to $2,374,000 for the comparable
period one year ago. The increase was largely due to the Acquisitions which
accounted for $1,560,000 in expenses of which $634,000 was non-cash stock option
expense.
Depreciation expense was $1,668,000 for the three months ended September 30,
1998 compared to $376,000 for the three months ended September 30, 1997 due
primarily to ACG, which had $1,613,000 of depreciation expense due to new
equipment acquisitions to perform large construction projects, and Acquisitions
which had depreciation expense of $819,000 for the three months ended September
30, 1998.
Goodwill amortization increased to $687,000 for the three months ended September
30, 1998 from $225,000 for the three months ended September 30, 1997 due
primarily to the Acquisitions.
12
<PAGE>
Net interest expense for the three months ended September 30, 1998 was $691,000
compared to $104,000 for the comparable period one year ago. The ACG net
interest expense for the third quarter of 1998 was $658,000. The increase in
amounts outstanding under bank credit facilities with respect to financing of
the Acquisitions, equipment acquisition lines and the revolving line of credit
resulted in increased aggregate net interest expense. See Liquidity and Capital
Resources for a discussion of the Company's debt facilities.
Income tax expense increased to $1,902,000 from $631,000 due primarily to the
profitable operations of ACG.
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
The Company had consolidated net income of approximately $2,559,000 for the nine
months ended September 30, 1998, compared to net income of $2,002,000 for the
nine months ended September 30, 1997. The increase in net income for the nine
months in 1998 when compared to 1997 is primarily due to Acquisitions which
offset the impact of severe winter weather on cable construction operations,
primarily in the northeastern United States, and lower profit margins at the
commencement of several significant, regional, multiple-year contracts with
major telecommunications companies. During the nine months ended September 30,
1998, ACG incurred transition costs to relocate crews and equipment and set up
operations in several new locations, as well as reducing its involvement in its
Dallas, Texas project. TCS realized improved net sales, as well as operating
cost efficiencies, during the third quarter for contracts in Orlando, Florida
and Denver, Colorado. (See discussion of gross profit below.) In the fourth
quarter, the Company expects to continue to realize increasing profitability
from maturing regional contracts, but will also continue to incur transition
costs during the start-up phases of certain large contracts and its reduced
activity in its Dallas, Texas project.
For ACG, pretax income for the nine months ended September 30, 1998 was
$5,961,000, compared to $3,371,000 for the comparable period in 1997. ACG's
pretax net income for the nine months ended September 30, 1998 was significantly
effected by goodwill amortization of $1,992,000 and non cash stock expense of
$1,806,000 due primarily to stock options granted below market value to
employees of the Acquisitions and the TCS division. In contrast, for the nine
months ended September 30, 1997, goodwill amortization was $618,000 and non-cash
stock option expense was approximately $128,000.
Consolidated net sales for the nine months ended September 30, 1998 were
$104,741,000, compared to $35,826,000 for the comparable period in 1997 - an
increase of nearly three-fold due primarily to the Acquisitions, which accounted
for $38,985,000 of the increase and TCS, acquired in September 1997, which
contributed $19,842,000 to the sales increase. Operations of ACG, owned for at
least one year, had a net sales increase of $13,607,000 or 61% for the nine
months ended September 30, 1998. For all ACG operations, net sales for the nine
months ended September 30, 1998 were $91,508,000. For Conceptronic, net sales
for the nine months ended September 30, 1998 were $13,233,000, compared to a
$13,646,000 for the comparable period in 1997.
Consolidated gross profit margin, excluding depreciation, was 25% of sales for
the nine months ended September 30, 1998 compared to 32% for the nine months
ended September 30, 1997. The decrease in margins is attributed to ACG, which
was in the start-up phase for several large regional cable construction
contracts. The impact of adverse weather conditions, in comparison to mild 1997
weather conditions, also reduced ACG's gross profit margins. With respect to
White Mountain which is commencing significant, multiple-year projects, it
experienced reduced gross profit margins from historical percentages due to the
costs associated with starting the large projects, as well as from its reduction
in activity in its Dallas, Texas project. The reduced margins from the
communications segment were offset in part by consistent margins at
Conceptronic, which had 33% in the nine months ended September 30, 1998.
Consolidated selling, general and administrative expenses for the nine months
ended September 30, 1998 were $11,247,000, compared to $5,943,000 for the
comparable period in 1997. The increase was largely due to the Acquisitions,
which had $3,973,000 in selling, general and administrative expenses for the
nine months ended September 30, 1998, and from TCS, acquired in September 1997,
which had increased expenses of $1,138,000 in 1998.
Depreciation expense increased to $4,463,000 for the nine months ended September
30, 1998, compared to $824,000 for the nine months ended September 30, 1997 due
primarily to ACG which made fixed asset acquisitions of $6,967,000 during
calendar year 1997, and $10,943,000 during the nine months ended September 30,
1998. The capital assets are amortized over sixty months. Further, the
Acquisitions had $2,050,000 in depreciation for the nine months ended September
30, 1998. Goodwill amortization increased to $1,992,000 from $618,000 in the
comparable period one year ago due to the Acquisitions and TCS, which was
acquired in September 1997.
13
<PAGE>
Net interest expense for the nine months ended September 30, 1998 was
$1,963,000, compared to $250,000 for the comparable period in 1997. The ACG net
interest expense increased to $1,855,000 for the nine months ended September 30,
1998, compared to $190,000 in the comparable period in 1997, due to the
Acquisitions whose purchases were partially financed through bank financing and
due to equipment financing lines for the above expanded capital assets
acquisition program. (See discussion of expanded bank credit facilities in
LIQUIDITY and CAPITAL RESOURCES.)
Income tax expense increased to $3,034,000 for the nine months ended September
30, 1998 from $1,003,000 in the comparable period one year ago. The nine months
ended September 30, 1997 reflect the reversal of valuation allowances primarily
recorded against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
On January 2, 1998, the Company acquired Can-Am and Schenck which provide aerial
and underground construction and splicing services for both fiber optic and
coaxial cable to major telecommunications customers.
The purchase price was approximately $35 million and consisted of 1,809,000
shares of common stock of the Company and approximately $15 million in cash. The
Company has classified as goodwill approximately $27.4 million which represents
the cost in excess of the fair value of the net assets acquired. Goodwill is
being amortized using the straight-line method over 20 years. The Schenck
purchase agreement contains provision for additional payments by the Company to
Schenck shareholders to be satisfied by the issuance of the Company's common
stock and cash, if certain adjusted EBITDA thresholds are met for the year
ending December 31, 1998. One-half of the additional payment to Schenck
shareholders will be satisfied by the issuance of shares of common stock valued
at $9.75 per share. The second half of the payment will be in cash. Any
additional payments earned under the terms of the agreement will be recorded as
an increase in goodwill.
In the third quarter of 1998, the Company acquired Underground Specialties, Inc.
("USI") which provides underground building services for fiber optic cable
construction projects to major telecommunications customers. The purchase price
was approximately $7.3 million and consisted of 242,000 shares of common stock
of the Company and approximately $3.6 million in cash. The Company has
classified as goodwill approximately $4.0 million which represents the cost in
excess of the fair value of the net assets acquired. Goodwill is being amortized
using the straight-line method over 20 years. The USI purchase agreement
contains provision for additional payments by the Company to USI shareholders to
be satisfied by the issuance of the Company's common stock and cash, if certain
adjusted EBITDA thresholds are met for the year ending July 31, 1999. There is
no cap for such provisional payments. One-half of the additional payment to USI
shareholders will be satisfied by the issuance of shares of common stock valued
at the lesser of $15.50 per share or the market value with a minimum price of
$13.625. The second half of the payment will be in cash. Any additional payments
earned under the terms of the agreement will be recorded as an increase in
goodwill.
Consolidated net cash used by operations for the nine months ended September 30,
1998 was $1,498,000, compared to net cash provided by operations of $747,000 in
the nine months ended September 30, 1997. The change in cash flow from
operations is due to the greater sales volume of construction activity which
caused an increase in ACG receivables and unbilled receivables for materials.
Net cash used for investing activities in 1998 was $28,060,000, compared to
$12,834,000 in the comparable period in 1997. The increase in investing
activities was primarily due to the Acquisitions, which required $17,441,000 in
net cash, as well as significant expenditures for capital assets for new cable
construction contracts which used $10,619,000 in cash. Net cash flows provided
by financing activities was $29,936,000 for the nine months ended September 30,
1998, compared to $4,930,000 for the same period in 1997 which reflects advances
from TCI for contract funding and bank financing used to purchase the
Acquisitions, as well as to expand the capital asset base for new contracts in
1998.
The Acquisitions significantly impacted various balance sheet accounts during
1998. Accounts receivable increased $27,903,000, primarily due to the
consolidation of Acquisitions, as well as due to new large projects at White
Mountain and TCS divisions. Accounts payable increased by $12,766,000 due to the
Acquisitions and costs of new contracts. Long-term debt increased $14,720,000
due primarily to the use of $15,016,000 in bank acquisition financing to acquire
Can-Am and Schenck. Unbilled receivables for materials which increased by
$8,208,000, relate to cable system component equipment acquired in connection
with TCI turn key contracts in Dallas, Denver and Portland.
14
<PAGE>
On January 2, 1998, the Company expanded its credit facilities with NationsBank,
NA. In connection with its acquisition of Can-Am and Schenck, the Company
entered into an aggregate of $15,016,000 in new acquisition financing
facilities. The facilities have a five-year amortization rate for repayment of
the principal of the acquisition financing facility and include a balloon
payment of approximately $4 million of the facilities in March 31, 1999. The
acquisition financing bears an interest rate of LIBOR, plus 275 basis points
which is subject to a reduction in rate to LIBOR, plus 175 basis points if
certain cash flow objectives are achieved.
During the nine months ended September 30, 1998, the Company expanded both its
ACG revolving credit facility from $4 million to $15 million, and equipment
financing facility from $3.5 million to $13 million under the same interest
rates and covenants as the original lines of credit.
Further, the Company consummated a term loan to refinance existing equipment
financing facilities at Can-Am and Schenck. The proceeds of this line were
$2,400,000, are payable over 48 months, and bear an interest rate at LIBOR, plus
165 basis points.
To hedge the variable term loan interest rate risk for $10 million in notional
amount of the acquisitions financing facilities and the $2,400,000 in notional
amount of the refinancing term loan, the Company has entered into various
interest rate swaps pursuant to which it pays fixed interest rates and receives
variable interest rates on the same notional amount. During the nine months
ended September 30, 1998, the Company's payment under the three new interest
rate swaps aggregated $34,000. The Company had no receipts pursuant to the
interest rate swaps.
The Company had $16,500,000 in revolving lines of credit with commercial banks
of which $9,470,000 was drawn down as of September 30, 1998 to fund increased
inventories, capital equipment purchases and working capital.
The Company continues to actively pursue acquisitions in the telecommunications
construction and other industries. Subject to due diligence and other
considerations, the Company's commercial credit facilities for equipment
financing, revolving lines of credit and acquisition financing facilities may be
expanded. In the event that one or more satisfactory acquisition candidates are
located, the Company may seek to expand its existing credit facilities or issue
additional equity or subordinated debt.
The Company believes it has sufficient cash flow from operations, cash on hand
and availability under its credit line to meet its liquidity needs.
The Company's cable construction operations are expected to have seasonally
weaker results in the first and fourth quarters of the year, and may produce
stronger results in the second and third quarters. This seasonality is primarily
due to the effect of winter weather on outside plant activities in the northern
areas served by ACG, as well as reduced daylight hours and customer budgetary
constraints. Certain customers tend to complete budgeted capital expenditures
before the end of the year, and postpone additional expenditures until the
subsequent fiscal period.
YEAR 2000 DATE CONVERSION
The Year 2000 issue relates to the inability of certain computer software
programs to properly recognize and process date-sensitive information relative
to the year 2000 and beyond. Without corrective measures, this issue could cause
computer applications to fail or to create erroneous results. Incomplete or
untimely resolution of the Year 2000 issue by the Company or by its key vendors,
customers suppliers or by other third parties could have a materially adverse
impact on the Company's business, operations or financial condition in the
future.
During 1998, ACG commenced the upgrading of its business information systems
through common integrated computer and software systems throughout ACG. As a
by-product of the implementation of the new integrated business reporting
system, ACG expects to remediate Year 2000 compliance issues at certain of its
divisions which were not already Year 2000 compliant. All ACG divisions are
expected to be operating on the new integrated business system by the second
quarter of 1999 with most ACG divisions completed during the first quarter of
1999.
In conjunction with Arguss' review of its Year 2000 compliance issue, the
Company has conducted an inventory of its information technology ("IT") and
non-IT, as well as its telecommunications systems. This inventory will be
reconfirmed during the fourth quarter of 1998 with the objective of finalizing
Year 2000 remediation plans. ACG has addressed its Year 2000 compliance issue
for IT and non-IT systems within the framework of its new integrated business
reporting system. Conceptronic expects to complete steps necessary to remediate
significant Year 2000 compliance issues by the second quarter of 1999. The total
cost with respect to systems and other modifications to Company IT, non-IT and
telecommunications systems is not expected to be material to Arguss' financial
position.
15
<PAGE>
At September 30, 1998, Arguss was also in the process of identifying and
prioritizing critical suppliers and customers and communicating with them about
their plans and progress in Addressing the Year 2000 problem. Detailed
evaluations of the most critical third parties have been initiated. Contingency
plans will be developed in the first quarter of 1999 in response to the detailed
evaluations.
Based upon currently available information, the Company expects that all phases
of its Year 2000 project will be completed by the end of the second quarter of
1999. With the completed and planned Year 2000 modifications to its IT systems
and non-IT systems and telecommunications systems, the Company currently
believes that the Year 2000 issue should not pose significant operational
problems to the Company. There can be no assurance, however, that the systems of
other parties upon which the Company's business relies, including, but not
limited to, the Company's key vendors, customers, suppliers and other third
parties will be converted on a timely basis. If the Company's Year 2000
remediation is not completed in a timely manner, or if the systems and
applications of key third parties are materially impacted by the Year 2000
issue, the Company could lose certain of its abilities to efficiently engage in
normal business activities which could have a material adverse effect on the
Company's business, financial condition or results of operations. Although some
business disruption in the Company's business may be likely as a result of Year
2000 failures by third parties, the Company is not able at this time to
ascertain the extent of any such disruption. Contingency plans will be developed
in the first quarter of 1999 in response to the Company's evaluation of Year
2000 business exposures. Arguss believes that, with the implementation of new
business systems and contingency planning with respect to key vendors and
customers, the possibility of significant business interruptions of normal
operations should be reduced.
The dates on which the Company believes it will complete its Year 2000
modifications and initiatives and the project costs are based upon management's
best estimates will be achieved and actual results could differ materially from
those anticipated. In addition to the Company's reliance on third parties to
remediate their own Year 2000 issues, specific factors that might cause such
material differences include, but are not limited to, the continued availability
and cost of trained personnel and the ability to locate and correct all relevant
computer codes.
In addition to its internal systems and external supplier and customer
relationships, Arguss has exposure to Year 2000 compliance issues with respect
to potential acquisitions. The Company includes Year 2000 compliance in its
evaluation of acquisition candidates, as well as in its due diligence in
progress. At October 31, 1998, the Company had no acquisition in progress.
Non-compliance with Year 2000 could have an adverse impact on valuations of
potential acquisitions or reduce Arguss' programs of making acquisitions.
FORWARD LOOKING STATEMENTS
Statements made in the quarterly report that are not historical or current facts
are "forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that actual results may differ substantially from such forward-looking
statements. Forward looking statements may be subject to certain risks and
uncertainties, including - but not limited to - continued acceptance of the
Company's products and services in the marketplace, uncertainties surrounding
new acquisitions, floating rate debt, risks of the construction industry,
including weather and an inability to plan and schedule activity levels, doing
business overseas and risks inherent in concentration of business in certain
customers. All of these risks are detailed from time to time in the Company's
filings with the Securities and Exchange Commission. Accordingly, the actual
results of the Company could differ materially from such forward-looking
statements.
ARGUSS HOLDINGS, INC.
PART II
OTHER INFORMATION
Items 1,2, 3, 4 and 5: Not Applicable.
Item 6: Exhibits and Reports on form 8-K
(a)
27 Financial Data Schedule
(b) Reports on Form 8-K
In a Report on Form 8-K/A dated September 4, 1998, the Company reported under
Item 2 "Acquisition or Disposition of Assets," the acquisition by the Company
through a wholly owned subsidiary of Underground Specialties, Inc. ("USI")
Financial statements of business acquired: Audited balance sheets of
USI as of July 31, 1998 and 1997 and related statements of income,
retained earnings and cash flow for the years then ended.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Arguss Holdings, Inc.
November 12, 1998 By: /s/ Rainer H. Bosselmann
------------------------------------
Rainer H. Bosselmann
Chief Executive Officer
November 12, 1998 By: /s/ Arthur F. Trudel
------------------------------------
Arthur F. Trudel
Principal Financial Officer and
Principal Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECURITIES
AND EXCHANGE COMMISSION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS
SCHEDULE HAS BEEN UPDATED TO REFLECT THE ADOPTION OF FINANCIAL ACCOUNTING
STANDARDS BOARD STATEMENT NO. 128, "EARNINGS PER SHARE."
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $1,593,000
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<RECEIVABLES> 49,767,000
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